Why Shale Oil is not the Game Changer we Have Been Led to Believe - Part 2

One narrative that is being heavily marketed right now is that the shale plays are true game-changers and there's really nothing to worry about for the foreseeable future. Heck, the story says that the U.S. will soon exceed Saudi Arabia in oil production and become energy independent, that it has so much natural gas that it might as well build export terminals, and that there's 100 years of natural gas just waiting to be used.

Unfortunately, none of this is really true. Here's how I can make the case for that assertion using just three charts.

This first chart comes to us from the EIA courtesy of one Mr. Sweetnam, a former director at the EIA who was promptly reassigned to a distant position when his superiors discovered that this chart revealing declines in existing conventional oil fields had been released to the public.

What this graph shows is the projected decline of all known projects in 2009 (so this does not have the U.S. shale 'revolution' baked into it, but I'll get to that shortly), and it shows that those projects are going to slip from delivering 85 million barrels per day (bpd) of crude oil to just 45 million bpd between 2012 and 2030. In other words, 40 million bpd will go missing. But it's worse than that, because demand is expected to grow, leaving a gap of more than 60 million bpd by 2030.

If that sounds like a lot, it is, but that's just an assumed rate of production decline of 4.8% per year, which is right in the midzone of expert estimates. Some estimate decline rates as high as 6.5%, which would really amplify the drop and the resulting gap.

The top line is showing how much oil demand would grow if it was going to expand at the usual historical rates. The gap between those two modeled states is 43 million barrels. To put that in a U.S. shale context, the EIA projects that the domestic shale plays might deliver as much as 3 million barrels per day by 2020, which is nothing to sneeze at, but even with that there's a projected 40 million bpd shortfall.

The second chart I want you to look at is this one which shows total world crude oil production over the past 12 years:

Between 2004 and 2012, the total supply of global crude oil + condensates (a definition which excludes the non-transportation fuels known as natural gas plant liquids and biofuels) has just flopped around in a tight band with only 5% wiggle.

It bears noting here that the 2004 average spot price for crude oil (using the Brent contract, as that better defines the 'world oil' price) was $38.35/bbl, while the average 2012 spot price was $111.63, or 2.9 times higher than the 2004 price.

Despite this near tripling in price, the global supply is just sitting there stuck on a plateau. Economically speaking, this is not supposed to happen. What is supposed to happen is that suppliers will react to these higher prices and deliver more to the market, and then prices will settle down. But that hasn't happened, which indicates that global oil supplies are, as expected, constrained by something other than market forces.

What also happened during the time that global supplies of crude oil were undulating along that 5% plateau? Global expenditures on oil projects jumped by 100% from $300 billion per year to $600 billion. With a 100% increase in capital spending by the petroleum industry, we saw petroleum supplies remain more or less stuck in the exact same spot.

I am of the impression that $600 billion a year is a lot of money and that the people dedicating that capital are applying it to the very best projects available. I make the further assumption that when a project is identified and pursued, it is brought on line as rapidly as possible. There are not that many ways to look at this data other than noting that we are spending more and more to get the same...for now.

If you want to know why oil costs over $110 on the world stage, the last two charts above give you the answer: There's just not that much of it to go around.

Despite all of this effort and expense, the world is basically treading water with respect to overall production. The reason for that is contained in the first chart out of these three: The race is now on to bring new projects on line quickly enough to offset the losses from existing fields.

Petroleum is neither a U.S. issue nor any other specific country's issue, but rather a global commodity of immense importance. While the development of the shale plays in the U.S. is of domestic importance, it has not altered the global dynamic of static oil production – at least not detectably in the global supply charts. Not yet.

My prediction is that the underlying rates of depletion will continue to fight the recent production gains in the U.S. and elsewhere in the world until they soon come to a standstill, eventually swamping even heroic efforts.

Steadily rising energy costs and decreasing net energy yields will simply not be able to fund the future economic growth and consumptive lifestyles that developed nations are depending on (and that developing nations are aspiring to). In fact, the persistent global economic weakness we've been experiencing over the past years is an expected symptom of the throttling constraint decreasing net energy places on growth.

If you care about the future of the economy, your standard of living (or that of your children), and/or your quality of life, you need to fully understand this relationship between growth and net energy. Your individual future (and our collective one) depends on it.

Leave a comment

Dane Howell on January 23 2013 said:

Since 2008, Bernanke's extraordinary QE measures and the Fed's relentless degradation of the dollar has had more to do with the rising price of oil than conventional supply/demand (ex. for each round of QE take off 20-40% of the oil price).

As far as US Shale - seems like your article is cherry picking facts to fit your thesis. Why don't you carry the 'Global Crude + Condensate Production' graph out to 2030 w/estimates? Why not carry out every chart for that matter and stay consistent? Also, where does natural gas fit into all this? i.e. nat gas supplanting oil in transportation fuel? etc.

Randy on January 23 2013 said:

What a bunch a (expletives!)!

It's the peak oil arguments regurgitated.

And, ah, thanks for showing us that 'secret' liquids fuel chart. Glad you were somehow able to get your hands on it from the 'reassigned EIA director.' Wow. I guess we're doomed, huh?

Ed on January 23 2013 said:

@Randy

Its not secret, do some basic research and find it in EIA publishings.

@Dane

Look at the decline rates for fracking, if you want to see the 50 year future of natural gas and shale

EVsRoll on January 24 2013 said:

Ironic, but the situation you describe is probably the next best thing for our atmosphere.